Look beyond the noise to economic growth

Investors need to see continued improvement in economic data to extend their investment horizons and assume greater risk exposure

Mar 18, 2014 @ 12:01 am

By Robert C. Doll

The lack of a diplomatic solution to the crisis in Ukraine was a headwind. Russia reiterated it does not plan to intervene in Eastern Ukraine, but additional military exercises made markets nervous. Tougher talk from the U.S. and European Union emphasized tighter sanctions, which could cause further escalation.

In China, growth decelerated as February exports, commodity imports and credit data came in below expectations. The market weakness attributed to Ukraine and China may have also been from positioning and sentiment dynamics. A more difficult first quarter earnings backdrop is now anticipated.


Consumer confidence dipped slightly with preliminary March numbers on the low side of consensus. Confidence has held up fairly well given the historic weather, reduction in food stamps, elimination of extended unemployment insurance and geopolitical crisis in Ukraine. In light of surprising consumer resiliency, moderate job gains combined with improving wage gains should result in faster growth.

Retail sales increased 0.3% in February but were revised lower for January and December. Although the headline number was higher than consensus expectations, the data was a modest disappointment after the downward revision to the prior months. Weather remains the dominant theme.

U.S. economic growth has slowed by approximately 1% since last fall. Weather and inventory correction have been the largest contributors to the slowdown in our opinion. The inventory effect counters the upside growth surprise in the second half of 2013 and could weigh on growth beyond the first quarter. But the weather effect should turn positive in the spring, allowing growth to accelerate to roughly 3% after the spring thaw.

Growth for the United States must now come from capital spending and exports. The environment is reminiscent of the time after World War II, rather than recent economic expansions with an increase in consumer spending and government expenditures. The U.S. has three natural advantages: 1) population growth, 2) openness to legal immigration and 3) vast stores of natural resources. U.S. access to cheap natural gas and oil through fracking can increase exports and attract manufacturing back to the country.

Institutional investors have repudiated U.S. equities and decreased allocations from approximately 40% in 2007 to roughly 25% today. Equities have experienced outflows of $700 billion and more than $1 trillion from active equity managers. Companies have been buying the shares that were sold, as corporate management has used approximately 60% of post-dividend free cash flow to buy back their own stock.


It will require continued improvement in economic data to encourage more investors to extend their investment horizons and assume greater risk exposure. Any policy misstep or backup in government yields will heighten market volatility and increase the likelihood of a pullback. The disinflationary backdrop will likely ensure that global policy remains supportive and that any setback is short-lived. Investor attention must move toward economic improvement, away from the weather slowdown and issues in Ukraine, Russia and China. Despite near-term weakness, we believe the macro environment argues for further cyclical advance in equities. A more durable recovery should bolster investor confidence as the year progresses, encouraging many to gradually increase exposure to equities.

Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen Asset Management


What do you think?

View comments

Recommended for you

Upcoming Event

May 30


Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video


Behind the scenes of InvestmentNews' Best Places to Work

Benefits and vacation policies are important for hiring top talent, but giving employees a sense of ownership in decision-making is among the most important qualities, editor Fred Gabriel says.

Latest news & opinion

Why we must create a more diverse and sustainable financial planning profession

CEO explains how, why a firm should commit to conscious inclusion.

Pope Francis wants financial advisers to work like fiduciaries

Vatican bulletin admonishes advisers who act against the best interests of their clients.

Wells Fargo sees slowdown in advisers exiting this year

The 2016 banking scandal and public relations fiasco had alienated some of the firm's advisers.

States trying to save DOL fiduciary rule appeal rejection of effort to intervene

California, New York, Oregon ask for rehearing by full 5th Circuit Court of Appeals.

Employees at best places to work focus on the person — and the fun

Employees at best places to work firms focus on the person and fun.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print